Being a homeowner comes with many rewards, and the day when you make your last mortgage payment is sure to be a highlight. To help you get to that day sooner, check out these strategies and benefits of making extra mortgage payments.
Benefits of Extra Payments:
Interest Savings
Making extra payments can reduce your loan’s principal balance faster, which means you’ll pay less interest over the life of the loan. This can save you thousands of dollars. During the initial years of your mortgage, most of your payment goes toward interest. By making extra payments, you can reduce the principal faster, leading to smaller interest payments in the future.
Early Loan Payoff
Making one extra payment per year can help you pay off your a 30-year mortgage faster. Furthermore, interest is calculated based on the remaining loan balance, so additional principal payments each month will significantly reduce your interest payments over the course of the loan.
Here’s an example: If you hypothetically paid an extra $100 per month on a $350,000 30-year mortgage with a 6% interest rate, you could entirely pay off the loan 31 months earlier. If you wanted to go the extra mile, paying an extra $200 per month will help you pay off the loan about 5 years earlier!
Equity Buildup
Paying down the principal faster increases your home equity more quickly. This can be helpful if you plan to sell your home or need to take out a cash-out refinance. Upon reaching 20% equity in your home, you can also cancel your PMI (Private Mortgage Insurance) payments for additional savings (FHA loans would need to be refinanced into a conventional loan to cut PMI). Building equity faster means you’ll have fewer total payments to make, which will help you achieve greater financial flexibility.
Once your mortgage is paid off, you’ll have more freedom to allocate funds to other goals, such as retirement savings, investments, or other expenses.
Strategies For Extra Payments:
Round Up Your Payments
If you want to make extra payments that are more manageable, you could always round up. This small increase can make a big difference over time.
Cut Expenses
Identify items in your budget that you can cut to redirect money toward your mortgage. From non-essential expenses to credit card debt, identify what may be weighing you down financially and reallocate those funds. For instance, taking on a second lien mortgage could help you get cash out quickly and pay off debts.
Lump Sum Payments
If you end up with an unexpected financial windfall, you can use that money to help pay down your principal. Whether it’s an inheritance left by a loved one or a hard-earned bonus from work, applying these funds directly to your mortgage can prove beneficial in the long run.
While it can certainly be advantageous to make extra mortgage payments, beware of overextending yourself and potentially falling behind on other important monthly bills.
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*As a member of the AmeriHome family, borrowers are part of the AmeriWallet Rewards program. If you completed a home loan with us once, you will qualify for a $750 lender credit for all of your future refinances or home purchases done with AmeriHome, for any property you own. To qualify for this offer, you must have previously financed the purchase of a home or refinanced with AmeriHome. You have financed with AmeriHome when AmeriHome Mortgage Company, LLC appears on the previous Promissory Note for your loan, and you are listed as a borrower on the Note. Credits will be applied only if your loan closes with AmeriHome. This offer can not be combined with any other offers and is not applicable for FHA Streamline, or VA IRRRL Refinance transactions. Other restrictions may apply. Terms and conditions are subject to change. AmeriWallet Rewards program is subject to termination without notice.
